Indian economy in 2018 has seen its heroes and villains: What does 2019 hold for us?

In many ways, the Indian economy of 2018 was a multi-plot flick; there were enough twists and turns to keep the audience stuck to their seats till the end. This was a year when Indian economy faced a major trust deficit when its official GDP numbers were disputed widely. Also, a year when the central bank-government relation touched an all-time low and unemployment and agrarian distress dominated the scene.

Imagine these events being played back-to-back on a big screen, it has all the right ingredients to become a gripping political thriller with its many sub-plots. Here’s look at some of the major themes that played out in 2018:

RBI vs govt.

Of the many plots, most certainly, the biggest one was the showdown between the Narendra Modi government and the Reserve Bank of India (RBI). In the 83-year old history of India’s Reserve Bank, this was the first time things came to a breaking point between the two.

The RBI top brass took the battle public and openly warned the government the consequences of undermining the central bank’s autonomy. Deputy governor, Viral Acharya’s words were no less than filmy dialogue when he said, "The Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution.”

There were frequent encounters between the two on multiple occasions on different issues--central bank’s governance, government demand for RBI’s excess reserves, watering down the prompt corrective action (PCA) plan and with respect to regulation of country’s payments system.

Representational image. AP

At the end of the plot 1 (RBI VS govt), the RBI governor, Urjit Patel –who played a supporting actor during demonetisation episode--turned out to be the unlikely hero. Patel shed his image of a subservient technocrat and a silent spectator to RBI’s unmaking by launching his ultimate weapon—resigning mid-term.

The audience was initially disappointed with Patel in the flick—the pace at which he counted notes in RBI and his dialogue delivery—but Patel’s final act thrilled them and irked some. It triggered further speculations in the financial markets on what lies ahead for RBI. The Modi government brought in former economic affairs secretary Shaktikanta Das to douse the fire at the Mint road. This plot is still an unfolding one.

CSO and India’s data credibility

Yet another major plot of Indian economy 2018 was doubts over India’s data credibility. The release of GDP back series figures by the government, in November, this year was welcomed as a work of fiction by a section of analysts. The lack of correlation of headline GDP figures with several high-frequency indicators surprised many, raising big questions on the accuracy of the GDP figures. Between the old Sudipto Mundle-series and the newly released figures, economists were caught in a big puzzle.

The new back series may have put the NDA at an advantageous position since the average growth for FY06 to FY12 now comes to 6.9 percent (new series) from 8.2 percent (old series) and inferior to the 7.4 percent under the Modi-led NDA rule.

In FY 2011, the growth figure has been sliced by 180 basis points to 8.5 percent from 10.3 percent. The unusual involvement of Niti Aayog in the GDP back series launch, added to the conspiracy theory that politics is meddling with India’s official data office. Obviously, questions were raised whether Chief Statistician Pravin Srivastava failed to uphold the stature of CSO. When the group of those who questioned the GDP figures increased in size, India’s data credibility took a major hit.

Farmer and agrarian distress

The camera pans to the dry fields of rural India; the movie shows the pitiable situation of Indian farmer, who undoubtedly remained the suffering class in 2018 as well. Farm loan waiver announcements dominated as the distressed farmer is also an easy target for vote-hungry politicians across party lines. A few more big states like Karnataka, Rajasthan and Madhya Pradesh joined the loan waiver bandwagon this year and more states are likely to join.

Loan waivers continued to be the easiest tool for politicians to win votes at the cost of taxpayers’ money. The Modi government also used the tried and tested tools such as offering minimum support prices to ease the pain of the farmer but nothing has worked so far. Unsurprisingly, cases of farmer suicides continued in 2018.

Banks in distress

Banking sector mess continued to dominate the Indian economy in 2018. At least eleven public sector banks continue to be under the prompt corrective action plan of the RBI on account of their weak financial position.

The NCLT process, framed to speed up the resolution of bankrupt companies, has offered some relief to the banks to recover at least part of the bad loans. But the crisis phase isn’t over for banks yet. About 70 percent of the banking system continues to be dominated by state-run banks. Among them, except a few, the financial position of most banks continue to be weak.

These entities still continue to suffer from the ‘begging bowl syndrome’—the eternal dependence on the government for survival capital. The plight of NPA-ridden banks continued to dominate the woes of the Indian economy in 2018. As of December 2017, total 40 listed banks had gross NPA's at Rs 8,86,460.30 crore and as of September 2018, this grew to Rs 9,99,031 crore, meaning a jump of Rs 1,12,571 crore this year alone. Logically banks continue to be the victims of bad governance, imprudent lending and a sluggish economy.

What does 2019 hold?

Of course, the picture isn’t over yet. There is a general agreement that 2019 elections will be fought on rural issues and agrarian distress. Ahead of the parliamentary polls next year, and in the backdrop of the ruling party’s defeat in recent state elections, there is a strong likelihood of more voter-appeasing populist policies landing in India’s distant villages.

Loan waivers will certainly top the chart but there could be more surprises. The policy, reform priorities can change dramatically depending on the outcome of the Lok Sabha polls mid next year. What does 2019 hold for us?